A different distribution of risk

RMS’s latest medium-term rate (MTR) forecast for North Atlantic hurricane activity in the next five years dipped just below the long-term rate across the U.S. – the first time since RMS introduced the MTR in 2006. This key insight into changing hurricane activity has important business impacts for (re)insurers.

“From a pricing perspective, I would expect the MTR to give insurers food for thought, particularly given the market-wide decline in hurricane risk pricing in recent years,” Tom Sabbatelli (pictured), senior product manager in the RMS hurricane modeling team, explains. “But it also might impact on regional reinsurance buying activity – buyers might want to factor these findings into their purchasing strategies for the northeast U.S.”

The change to the forecast has been brought about by a combination of warm North Atlantic sea-surface temperatures (SSTs) and the steering force of atmospheric pressure systems which are driving an above average risk of hurricane activity along the northeast U.S. and maritime Canada.

Comparison of MTR to long-term. Blue areas show medium-term hurricane risk below long-term average in eastern and southern U.S. Yellow areas show risk above long-term average.

“Above average Atlantic SSTs are expanding the area over which hurricanes can develop and intensify,” explains Sabbatelli. “They are also shifting that zone further east towards Africa, and by so doing extending the period that hurricanes can harvest the warm-water energy needed to intensify.” This eastward shift, in evidence in the MTR forecasts for the last five years, is also heightening the directional influence of high pressure areas such as the Bermuda High.

“These atmospheric conditions and SSTs,” he continues, “are creating a geographical corridor that is funneling a greater number of hurricanes between the U.S. eastern seaboard and Bermuda.”

This steering effect was evident in the storm tracks of Hurricane Irene in 2011, which barreled through the Caribbean and up the U.S. east coast, and Superstorm Sandy in 2012, which tracked along the northeast coastline. Bermuda is also taking the brunt of this shift, with hurricane activity well above average in recent years.

“It’s creating a distribution of risk different to what we have seen in previous inactive hurricane periods,” he says, “with above average risk for the U.S. northeast, and below average for hurricane-prone regions such as Florida and Texas.” While, of course, in absolute terms these hurricane hotspots remain much more highly-exposed than the northeast, (re) insurers should take note of the shifting regional contributions.

Validating the numbers

The MTR forecast is based on the combined outputs of 13 statistical models spanning SSTs models, ‘shift’ models that identify periods of high and low activity in historic data, and ‘active baseline’ models that recognize the distorting influence of aerosol gases on hurricane activity in the 1970s and 1980s. Creating ‘what-if’ 5-year storm forecasts from 1970 to 2016 and comparing results with actual observations, the MTR forecasts have outperformed long-term rate forecasts on 75 percent of occasions.